NEV Insurance Pressure And AI Hurdles May Eventually Give Way To Modest Earnings Upside

Catalysts

About Cheche Group

Cheche Group operates a leading digital auto insurance technology platform focused on intelligent, AI enabled solutions for new energy vehicles and connected mobility.

What are the underlying business or industry changes driving this perspective?

• Although NEV penetration in China is accelerating and Cheche already serves roughly 10% of NEV deliveries, the push to reach 30% to 40% market share in three to five years could strain execution capacity and partner integration. This may limit the conversion of rising policy volumes into sustained revenue growth.
• While NEV insurance premiums are expanding far faster than the broader auto insurance market, the structurally lower take rates that currently depress net revenue per policy may persist longer than expected if insurers remain loss making on NEV risk. This could delay meaningful uplift in net revenues and earnings.
• Although AI driven claims automation and anti fraud tools promise high margin service revenues of RMB 300 million to RMB 500 million, the heavy reliance on accurate real time vehicle data and evolving autonomous driving use cases introduces regulatory and technical hurdles. These factors could narrow adoption and cap margin expansion.
• While Cheche plans to roll out its fintech and insurance technology toolbox globally beginning in late 2025, slower than anticipated overseas NEV adoption, localization challenges and the need for incremental compliance investment may keep international revenues below expectations and dilute near term net margins.
• Although disciplined cost controls and a declining operating expense base support the goal of adjusted operating profitability in 2025, maintaining low expense growth while scaling AI infrastructure, R&D for autonomous scenarios and global partnerships may prove difficult. This could pressure operating leverage and delay sustained earnings improvement.

Assumptions

This narrative explores a more pessimistic perspective on Cheche Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Cheche Group's revenue will grow by 17.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -1.0% today to 3.9% in 3 years time.
• The bearish analysts expect earnings to reach CN¥197.4 million (and earnings per share of CN¥0.39) by about December 2028, up from CN¥-31.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.1x on those 2028 earnings, up from -17.3x today. This future PE is lower than the current PE for the US Insurance industry at 13.4x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.46%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The rapid shift in business mix toward NEV policies, which carry structurally lower take rates in a still loss making NEV insurance market for carriers, could mean that strong growth in written premiums does not translate into commensurate revenue growth, constraining long term revenue and gross profit expansion.
• Management is counting on insurers eventually moving from losses to profits on NEV risk and then sharing higher economics. If accident frequencies, repair costs or regulatory pricing caps remain unfavorable, take rates may stay depressed for longer than expected, limiting improvement in net margins and earnings.
• The plan to reach 30% to 40% market share in China NEV insurance and to have overseas operations become a growth engine from 2026 requires sustained triple digit NEV CAGR and successful international execution. Any slowdown in global NEV adoption, regulatory setbacks or partnership friction could leave market share, revenue and earnings materially below the targeted trajectory.
• The company expects RMB 300 million to RMB 500 million in high margin AI driven claims and anti fraud service revenues as the NEV fleet scales. However, widespread adoption depends on access to high quality vehicle data, evolving standards for autonomous driving liability and insurer willingness to outsource key functions, and delays here would directly reduce the anticipated uplift in gross margin and operating margin.
• Operating expenses have recently declined due to tight headcount control and lower share based compensation. Scaling AI infrastructure, autonomous driving solutions and a global fintech toolbox may eventually require higher investment than implied, which could erode operating leverage and keep net margins and earnings below bullish expectations.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Cheche Group is $1.64, which represents up to two standard deviations below the consensus price target of $2.32. This valuation is based on what can be assumed as the expectations of Cheche Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $3.0, and the most bearish reporting a price target of just $1.64.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be CN¥5.1 billion, earnings will come to CN¥197.4 million, and it would be trading on a PE ratio of 6.1x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $0.94, the analyst price target of $1.64 is 42.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.